Deutsche Bank’s restructuring comes in after CEO runs out of options

A logo sits on display in front of the Deutsche Bank AG headquarters at dawn in Frankfurt, Germany. Photographer: Ralph Orlowski/Bloomberg

The kind of radical move made by Deutsche Bank AG Chief Executive Officer Christian Sewing has been on the table for years in Frankfurt.

But when it came to making a decision, the bank’s stewards preferred more incremental steps — until now. With a sweeping retreat that will see the lender exit its equities business and cut its 91,000-person work force by a fifth, Sewing is ending a trading foray that lasted for three decades and ultimately only led to losses.

The plan “is a necessary and courageous step for Deutsche Bank,” said Michael Huenseler, a fund manager at Assenagon, which owns the bank’s stock. To be successful, “Sewing will need implementation discipline among the leadership, support from employees despite radical cuts, tailwind from the financial markets and clients and more than just a little bit of luck. None of this certain.”

Back to the Beginning

What was once Europe’s dominant financial institution was virtually out of options. So, one year before its 150th anniversary, Deutsche Bank conceded it could no longer go head-to-head with the giants of global finance and decided to do to what it was created for in the 19th century: serving Germany’s big companies.

“Today we have announced the most fundamental transformation of Deutsche Bank in decades,” Sewing said in a press release. “We are returning to our roots.”

When the 49-year-old Deutsche Bank lifer was named CEO in April 2018, he said his mission wasn’t to change strategy but only to implement it more effectively. Even though the bank’s leaders had discussed at the time closing the entire equities division, they demurred for the same reasons they had previously. There was concern that shuttering the unit would damage other parts of the investment-banking business, such as underwriting initial public offerings.

It soon became clear to Sewing the more cautious approach wasn’t working. The credit rating company S&P Global cut the rating shortly after Sewing took over, while a raid on the bank’s headquarters in Frankfurt drove up funding costs and irritated clients. The share price dropped 25% between Sewing’s appointment and the end of the year.

Hopes Dashed

Hope that anything would change for the better on its own soon evaporated. The nail in the money-burning unit’s coffin came in early 2019 when it became clear equities trading racked up a loss of about $750 million on revenue of only about $2.2 billion last year. Convinced the bank could no longer afford to wait for a turnaround, Sewing started laying the groundwork for the move.

The CEO relied on a team of trusted lieutenants including Christiana Riley, the investment bank’s chief financial officer, who was promoted in Sunday’s reshuffle.

They analyzed business by business to establish how profitable — or unprofitable — each one was, the people said. Identifying the associated costs of each unit was a key component of the review, including each one’s cost of funding and its share in the expenses for back office staff — for example for anti-money laundering and compliance — that can’t be strictly allocated to just one unit.

They concluded that equities trading was too expensive and a turnaround would take too long. Crucially, the team decided it would be possible to eliminate the business without inflicting overly painful damage to one of the bank’s operations closest to Sewing’s heart: the transaction bank, which provides trade finance, cash management and hedging products to companies.

A Deutsche Bank spokesman declined to comment.

With work on the new restructuring plan picking up after the talks with Commerzbank collapsed, Sewing announced “tough” measures to come at the bank’s annual general meeting in May. Just a few weeks later, he unveiled his new vision built around reduced revenue from volatile trading business and growing income from more stable activities.

Initial reactions have been favorable. The labor union ver.di — a powerful voice thanks to its many seats on Deutsche Bank’s supervisory board — said it “welcomes” the reduction of the investment bank, though it also said it will insist job cuts in Germany happen in a “socially compatible” way.

The new strategy isn’t without risks. Sewing has decided to avoid a capital increase and is instead drawing down Deutsche Bank’s capital buffers to fund some of the eye-popping restructuring costs. While the pullback from equities is expected to make the bank less risky, lowering its need to hold capital, a thinner capital buffer could worry regulators.

Another problem: the bank’s track record on job cuts is dismal — though Sewing’s personal one is surprisingly good. Though the bank hasn’t said what countries will bear the brunt of the 18,000 jobs it’s targeting, it’s clear Germany with its tough labor laws isn’t exempted.

Finally, the plan continues to test the patience of shareholders who haven’t seen a decent return on equity since 2011 as Sewing is eliminating the dividend for the current year and next. He’s promised 5 billion euros in buybacks and dividends “starting in 2022.”

Bloomberg